LANSING — Bracing for what could be a multibillion dollar loss in state revenue, Michigan Gov. Gretchen Whitmer and legislative leaders on Monday agreed to cancel $80 million in general fund spending on special projects as they focus dwindling state resources on the coronavirus pandemic.
Whitmer also suspended hiring in state government and restricted all non-essential spending by government departments, actions she said were warranted “given the severity of the fiscal challenges currently confronting state government.”
More cuts are likely coming as the state confronts a fiscal crunch that could outlive the public health crisis.
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The global pandemic and business shutdown have prompted mass layoffs and are expected to depress Michigan tax collections. That could create a major revenue shortfall this year and complicate efforts to finalize a balanced budget for 2021 by October, as required by the state constitution.
“We’ve got to be really conservative right now,” Whitmer said in a Monday morning media briefing on the global pandemic that has so far spread to at least 5,486 Michigan residents and contributed to 132 deaths as of Sunday.
“We know that the toll COVID-19 is going to take on our state economy and on our ability to meet the needs of people is going to be real and it’s going to be felt in the budget.”
The governor spoke after signing two supplemental spending bills with a combined $150 million in COVID-19 response funding. But she vetoed other funding she and the Legislature had negotiated in early March, including $16 million to restore the Pure Michigan advertising campaign and $37 milion in “enhancement grants” for legislator pet projects.
As Bridge Magazine previously reported, one of the spending bills, ultimately sent to Whitmer’s desk two days after the state’s first confirmed coronavirus case, included $1 million for a bridge to Ferrysburg, $2 millon for the Detroit Zoo, $1 million for the North American International Auto Show, $500,000 for a Detroit Symphony Orchestra elevator and millions for other pet projects.
The plan easily passed the Legislature despite criticism from a handful of lawmakers, including one who blasted bill’s “pork spending” and another who argued “taxpayers of this state should not be forced to give the North American Auto Show $1 million so we can combat coronavirus.”
The spending became untenable because of the pandemic, prompting the Whitmer administration to renegotiate with Michigan Senate Majority Leader Mike Shirkey, R-Clarklake, and House Speaker Lee Chatfield, R-Levering. All sides, including Democratic leadership, agreed to cancel most of the non-coronavirus spending, they announced in a joint statement.
Whitmer vetoed $35 million for one of her top priorities, the Michigan Reconnect job retraining program that she first proposed more than a year ago. Her directives also froze state employee promotions and limited non-essential contracts, purchases, travel and training.
“Priorities from both sides were included in the bill, but the world has changed since those negotiations, and we must react and change along with that,” Whitmer said.
“It’s too early to determine the exact impact on state revenues, and knowing there is the potential for a significant loss in revenue, now is not the time to sign a bill for supplemental funding for anything other than dollars that can be utilized to help our COVID-19 response.”
Initial modeling by the Michigan Treasury and Budget Office suggest the state could lose $1 billion to $3 billion in anticipated revenue this year, and $1 billion to $4 billion in fiscal year 2021, said Treasury spokesman Ron Leix.
The gap between those projections shows “the wide range and uncertainty of the situation,” he said.
The Whitmer administration is awaiting additional details on the $2 trillion federal rescue packages signed last week by President Donald Trump, which includes $150 billion in funding for state and local governments. The funding will be divided proportionally based on population and no state will receive less than $1.25 billion.
It’s not yet clear how much money Michigan will receive and if the state will be able to use it to replace lost revenue, as opposed to spending directly on the coronavirus response, said Kurt Weiss, a budget office spokesman.
“The big question in this is how does that federal funding play out,” he said. “If they say it’s only for coronavirus, then we can’t backfill lost revenue and the problem is pretty difficult to solve."
Whitmer’s directives and the renegotiated spending bills are the state’s first public attempt to address a looming budget hole that “could easily exceed a billion dollars” in the current fiscal year, said Senate Appropriations Chairman Jim Stamas, R-Midland.
“This will at least take me back to the days of probably 2011 with some of the very, very challenging choices we had to make back then,” Stamas said, referencing a tumultuous budget nine years ago as the state crawled back from the Great Recession.
“It’s not going to be an easy task, and it will certainly put us to our task of holding and setting the priorities for the state.”
House Minority Leader Christine Greig, D-Farmington Hills, said she has seen budget models projecting a roughly $2 billion impact this year alone.
“As we get more into this, those numbers will be more refined, but it’s going to be big,” she said.
Greig said she is “incredibly concerned” by the looming budget crunch and the “tough decisions” it may force in state government.
“When you close down a big chunk of your economy, there’s going to be a fiscal impact,” she said.
“Public health and safety has to be the top priority, but as soon as we get past the public health crisis, we’re going to have a lot more decisions to make when it comes to our fiscal health.”
Michigan is seeing record unemployment claims as a result of the pandemic. Officials are urging residents to take turns alphabetically when applying online to avoid overwhelming a system that has strained under the weight.
The Anderson Economic Group in East Lansing has projected that as many as 1.4 million Michigan workers could lose at least two days’ wages over the next month-and-a-half as a result of the coronavirus pandemic, business shutdowns and the governor’s stay-at-home order.
Income tax revenue in states like Michigan with stay-at-home orders will ‘fall off a cliff,” according to the firm’s latest analysis. Sales tax revenue will “take a significant hit,” gas tax collections could fall and property taxes could drop if taxable values plummet.
Researchers at the University of Michigan have predicted 155,000 to 400,000 job losses in the state as a result of the pandemic.
“Tax revenue is going to be way down,” said Gabe Ehrlich, associate director of research seminar in quantitative economics at the University of Michigan. “The reality is, look, this is definitely going to put fiscal pressure both on states and on cities and obviously on households.”
As Bridge Magazine previously reported, Whitmer is exploring the possibility of tapping the state’s $1.2 billion rainy day fund.
“We need to look at all options and what are the priorities and how we make sure that we get the economy moving in our families back to work and that,” Stamas said. “ So, I'm not willing to say anything's off the table. We just need to have a little more time before we start making a lot of decisions like that.”
Greig said the state needs to look at “every tool available” to mitigate the impact.
“Certainly, in my eyes this certainly will qualify as a rainy day,” she said.
The Michigan Treasury and State Budget Office are working closely to assess the potential budget impact of the coronavirus crisis but have not yet released any public projections, citing unknown variables and wide gaps between the best- and worst-case scenarios.
The Whitmer administration is also awaiting additional details on the $2 trillion federal rescue packages signed last week by President Donald Trump, which includes $150 billion in funding for state and local governments. The funding will be divided proportionally based on population and no state will receive less than $1.25 billion.
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