Gretchen Whitmer inherits a stable economy, but an unforgiving budget

Gov.-elect Gretchen Whitmer will take office while Michigan’s economy is in good shape. But the state budget is under pressure, and it’s unclear how she’ll be able to pay for her big-ticket policy goals.

When she takes office in January, Gov.-elect Gretchen Whitmer will have the economic wind at her back — low unemployment, nearly $1 billion set aside for a rainy day, fiscal reforms to lower Michigan’s debt.

That should spell good news for a new Democratic governor who promises to invest more in road and water infrastructure and public schools.

Yet even before Whitmer lays out her spending priorities early next year, Michigan’s roughly $10 billion general fund — essentially, the state’s primary checking account — is under pressure. General fund tax revenue is forecast to grow modestly at best. And hundreds of millions of dollars are already spoken for, with past deals on funding roads and corporate tax credit payouts among the biggest takers.

Related: 5 places where Michigan’s governor and legislature can make deals
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And that’s while the economy is still humming. No one can say with any certainty when that will stop, though economists note that recessions are cyclical, and inevitable. While it appears that outgoing Gov. Rick Snyder will leave Lansing without having to govern through a downturn, economists say Whitmer likely won’t be as lucky.

The U.S. is now in the second-longest economic expansion on record, dating to the official end of the Great Recession in June 2009.

“I really hope that it will be possible for the Whitmer administration to enact a lot of her proposals. If we’re lucky, we will be able to fund some of them from a growing economy,” said Charles Ballard, an economist at Michigan State University. “But I hope her team is also thinking about the more difficult choices that will inevitably have to be made if the economy doesn’t grow fast enough, or starts to shrink.”

Governing amid budget pressure

A year ago this month, Whitmer told Bridge that voters on the campaign trail were telling her they felt left behind in an uneven economic recovery. She said that’s why she wants to expand access to early education and to skills training to help people land jobs that employers are demanding and that may be less likely to disappear in a bad economy.

Whitmer has proposed a number of new investments, from college scholarships to help students attend at least two years of school without debt, to universal preschool for 4-year-olds, to $2 million in new state funds to fix Michigan’s crumbling roads.

She has said some of her proposals could be funded with higher tax revenue spurred by a growing economy, and from new tax revenue generated from legalization of recreational marijuana and online sales tax captures.

Related: Michigan could see tax windfall from marijuana, betting and online shopping

Whitmer has not called for an increase to Michigan’s 4.25 percent income tax rate to pay for her priorities, though some fiscal experts have raised eyebrows at the notion that marijuana revenue or economic growth alone could fund some of her big-ticket items.

“Some folks will say the legalization of marijuana will lead to some future revenue increase. I think that’s true. I don’t think I would bank on that in the next budget,” said Al Pscholka, a former Republican chairman of the state House Appropriations Committee and Snyder’s budget director until this past February.

 

“If you’re thinking, ‘Let’s fix the roads,’ you’re probably going to need to have some sort of (new) revenue source to do that,” Pscholka said.

Whitmer has talked about issuing bonds if the Republican Legislature balks at raising transportation user fees, a tool that could spread payments out over years, Pscholka said, though, he added: “It’s not revenue, it’s debt.” (Whitmer’s campaign said bond revenue could be repaid as the state’s obligation to pay corporate tax credits expires, though that won’t happen for years.)

Other campaign promises would mean less revenue coming into the state, not more, raising additional questions about how the state would pay for Whitmer’s highest priorities. Whitmer proposed eliminating a tax on some retirement income, which Snyder signed into law in 2011 as part of a larger business tax overhaul; estimates suggest that could amount to as much as $300 million in lost state revenue if the so-called “pension tax” is repealed.

Whitmer voted against Snyder’s tax legislation in the Senate, citing the pension tax component and because it shifted more of the state’s tax burden from businesses to individuals. Ballard, who opposes repeal, said the state would lose more revenue as Michigan’s population continues to get older, and that doing so exempts one group of residents from paying income taxes but not another.

Whitmer also has vowed to stop funding community colleges and public universities from the nearly $14 billion School Aid Fund, a practice that former Democratic Gov. Jennifer Granholm started in the 2010 fiscal year because of general fund revenue shortfalls and later continued by Snyder, a Republican. The fund mostly pays for K-12 public schools, but more than $908 million this year is going toward higher education. Whitmer has opposed that diversion, saying she believes the School Aid Fund is intended to solely pay for K-12 schools and college funding needs to come from another source.  

Related: Truth Squad | Gretchen Whitmer says school aid money only meant for K-12

So far, though, she has offered few details on how she would make up the lost revenue for colleges and universities.

Through a spokesman, Whitmer declined to provide more details about her fiscal strategy, including how she would approach the state’s rainy-day fund, citing the early stages of building her transition team.

Abiding by past deals

Less revenue is potentially problematic given the state’s general fund already is under considerable strain. Chief among them is the 2015 legislative package to fund roads, Pscholka said.

In the fiscal year that starts Oct. 1, 2019 — Whitmer’s first budget — $325 million in state income tax revenue automatically will be diverted to pay for roads. That amount will climb to $600 million when fully phased in by 2021, a significant amount of money yet not close to the $4 billion in new spending experts say Michigan needs to devote annually to fix aging roads and infrastructure.

Another $400 million in future spending is earmarked for other commitments: an expanded homestead property tax credit, and a state match to federal funding for Michigan’s Medicaid expansion program.

All of which means Whitmer is unlikely to find the funding she needs for her ambitious programs without finding a new source of revenue or cutting back elsewhere, said Jordon Newton, a research associate at the nonpartisan Citizens Research Council of Michigan, which studies state budget pressures.

“Depending on how much in total spending her priorities have and what she wants to prioritize,” Newton said, “finding the money within the budget is going to be probably challenge No. 1.”

Adding to the challenge will be aligning her budget priorities with Republican majorities in the state House and Senate. Whitmer has said she wants to meet regularly with GOP leaders, including incoming Senate Majority Leader Mike Shirkey (Clarklake) and House Speaker-elect Lee Chatfield (Levering).

Both sides have talked at length, for instance, about finding solutions for road funding. Though Chatfield recently told reporters: “No one in the House Republican chamber ran on raising taxes.”

Related5 places where Michigan’s governor and legislature can make deals

That doesn’t mean, however, that Whitmer won’t be able to accomplish her goals. With a Republican Legislature, several business leaders say they are optimistic that divided government could force both sides to meet in the middle.

Bipartisanship also could help preserve fiscal reforms the Snyder administration achieved, from building up the state’s rainy day fund to paying down debt, said Sandy Baruah, president and CEO of the Detroit Regional Chamber.

“This is where I'm hoping this split government will work in our favor; I’m hoping that the Republican Legislature will actually put the brakes on a Democratic governor’s inclination to spend down the fiscal gains that we’ve made,” Baruah said.

What about a recession?

Recessions can’t be predicted. They’re often triggered by factors that extend beyond Michigan, like the dotcom bubble bust in the early 2000s or the world financial crisis in 2007-09.

Economists tell Bridge they don’t see imminent signs of danger. The state has made progress in diversifying its economy so it doesn’t rely as heavily on manufacturing and the auto industry, and unemployment is low. But the state is vulnerable should another downturn hit, in part because Michigan hasn’t yet recovered all of the jobs lost during the Great Recession and many residents have given up looking for work.

Related: Demand for Michigan workers is very high, but many have given up looking

Making it through Whitmer’s four-year term without another recession would be “a historical aberration,” Ballard said, since at that point the economic expansion would be the longest in history.

“If we are lucky, we will be able to pay for things through a growth dividend for a few years, and maybe for more than a few years,” he said. “But there is a good chance that economic growth will slow or stop.”

Should a recession happen, said Newton of the Citizens Research Council, “any plan for increased spending is going to have to contend with the inevitable decline in revenues.”

Are Snyder reforms enough?

Whitmer will inherit a state government that has worked to position itself to withstand another downturn. It has set aside more money in its reserves, though some experts say Michigan should consider saving more.

The general fund would be vulnerable in a recession because its largest source of revenue is the state income tax, which is tied to employment. Cities also would be vulnerable, both because of state revenue sharing cuts and falling property values.

The state has slashed $8.6 billion in statutory revenue sharing since 2002. That includes a $1.4 billion reduction in what Lansing sends Detroit, $128 million to Grand Rapids and about $100 million for both Lansing and for Flint, according to the Michigan Municipal League.

Related: In Michigan, more than 150 communities are financially distressed

That in turn has forced communities across the state to slash budgets for everything from police and fire to park maintenance and local roads. In Lansing, for example, the percentage of major streets that were in poor condition soared from 4 percent in 2004 to 40 percent in 2013.

A recession also most likely would mean a drop in property values, which in turn would cut a primary source of revenue for cities and townships. If the state is forced to fill in budget holes of its own, that could leave cities out in the cold.

Tony Minghine, chief operating officer for the Michigan Municipal League, considers the state’s current funding model for cities broken. Municipal advocates want to revisit Proposal A, which limits annual growth of an individual property’s taxable value to the lesser of the inflation rate or 5 percent.

While Prop A has slashed tax bills for Michigan residents, it also caps property tax growth because revenue doesn’t grow as fast as the economy. Minghine said such legislative reforms would be “no easy lift” even with a new administration.

“We need to have a serious conversation about restoring funding that would be healthy for cities,” he said. “Absent that, a recession would be catastrophic.”

What else should the new governor be thinking about?

Everything from continuing to fund pension and retirement health care liabilities, to following Snyder’s path on adopting budgets months before Oct. 1, when the state starts its new fiscal year, Pscholka said.

In addition, several experts said Whitmer should avoid drawing from the rainy-day fund unless it’s absolutely necessary. When Snyder took office in 2011, Michigan had just $2.2 million set aside, enough to run state government for barely 30 minutes. Short-term spending and one-time funding are low-hanging fruit when it comes to cuts.

One of Pscholka’s last bills as a state legislator was to cap the amount of money that could be withdrawn from the state’s reserves in a single year at 25 percent. The bill passed the House but died in the Senate at the end of the two-year term in 2016.

“I thought it was a good, common-sense piece of legislation so you weren’t using that as a crutch,” he said. “The last thing you want to do is start to tap that rainy day fund. You want to avoid that. That really does send a message to funders and bondholders and all that you really don’t have your financial house in order.”

Bridge reporter Ted Roelofs contributed to this report.

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Comments

Kevin Grand
Thu, 11/15/2018 - 12:43pm

I'm going to sit back and enjoy watching everything blow up in her face when she tries to keep promises that any reasonably intelligent person should've know she couldn't keep.

The same will hold true for down-ticket as well.

Just watch.

dlb
Thu, 11/15/2018 - 12:50pm

Sounds familiar to when Granholm came in after Engler drastically cut taxes and defunded many State programs. Granholm was left with inadequate revenue to provide necessary services and many critical programs in shambles.

Don
Sun, 11/18/2018 - 8:12am

Granholm was a closet republican, she spent most of her time under Englers desk. She sold the 20 M Pontiac silver doome for $375,000.00 she raised hunting and fishing fees for out of state peo-ple. She tryed to tax the people for picking blueberries in the NATIONAL PARKS. as AG she let Engler take over the Detroit Pudlic school and destroy it. AND she closed down the oldest state fair in the nation and illeglly sold it... almost for got no-bid contract to Calrlo for shitty roads she let him built!!!

Ken Tokarz
Thu, 11/15/2018 - 1:37pm

This is what I would like to see in Michigan schools

To be successful we must create the Pure Michigan Public Schools Act (PMPSA), the Pure Michigan Schools Student Engagement Act (PMSSEA) and the Pure Michigan Schools Maintenance and Construction Act (PMSMCA). Public Education in the State of Michigan has been plagued with indoctrination for the last 35+ years and the timing is right for Governor Whitmer and the State School Board to select a non-traditional candidate who will work with both/all parties to make Michigan a model for education reform. Our next State Superintendent of public education in Michigan will need to increase in State oversight, resolve foundation allowance disparity, define a basic education, eliminate loopholes, extend Pre-K programming, improve test scores, reward, take-away, increase collaboration and eliminate the duplication of services.

Pure Michigan Public Schools Act
o Tier I State funding
o Define programming required to provide a basic education and move ancillary programming to the PMSSEA
o Cap retirement (final average compensation) for Superintendents, administrators, teachers and support staff based upon the district membership group code
o Cap retirement years of service for Superintendents, Administrators, Teachers and Support Staff
o Cap personal time off and banked hours/days for Superintendents, Administrators, Teachers and Support Staff
o Create a four week July break for teachers, remaining breaks will be defined by the district membership group code
o Create an expedited degree that allows students graduate 2 years early
o Introduce skilled trades in the elementary schools ( art and music are not essential studies)
o Elimination of double dipping and retire/rehire
o Define statewide school year as August 1st through June 30th and PMPSA hours of instruction
o Increase days of instruction to 210 days and hours of instruction to 1,200 hours
Increase transparency to include college and professional tickets, food, lodging and conferences registration fees
o Define career paths and provide career specific programming
o If college math testing determines that a B student in high school has to take remedial courses the K12 school district will pay for that class
o Eliminate AP/IB programming and provide college level opportunities for students with special skill sets
o Increase reporting requirements
o Create a school of choice fee to cover community infrastructure costs ($750)
o Kindergarten and GSRP will become essential courses
o Require districts to cut utility consumption by 15% without infrastructure improvements
o Best practices only hit the surface when it comes to school reform and for local school districts to succeed the state will again have to step in and take a critical leadership role by adding additional requirements that will simplify and streamline school operations for local school boards and administrators

Pure Michigan Schools Student Engagement Act
o Tier II State Funding + Local Funding
o Define non-essential programming that local school boards will approve for their community: Art, Music, Career Training Education, Culinary Arts, Computer Aide d Design, Computer Aided Manufacturing, Dentistry, Advanced Placement, International Baccalaureate, Marshall Plan
o Create a modified retirement system for PMSSEA Administrators, teachers and support staff
o Cap retirement (final average compensation) for non-essential, administrators, teachers and support staff based upon the district membership group code
o Cap retirement years of service for non-essential, Administrators, Teachers and Support Staff
o Cap personal time off and banked hours/days for non-essential, Administrators, Teachers and Support Staff
o Create a two week July break for non-essential teachers, remaining breaks will be defined by the district membership group code
o Define the statewide non-essential school year as October through September and PMSSEA hours of instruction
o Increase days of instruction to 210 days and hours of instruction to 1,200 hours
o If a district is failing to provide a basic education the state will not have a mechanism in place to reduce funding for ancillary programs in that district and ultimately make the community responsible for the success or demise of that district
o Provide wraparound services and evening classes for interested students in grades 7-12
o Funding for Scouting programs, Club Sports, Culinary programs and Little League
o A school board must annually approve PMSSEA positions

Pure Michigan Schools Maintenance and Construction Act
o Tier III State Funding + Local Funding
o State oversight of construction documents and specifications
o Cookie cutter floor plans for new schools
o Define State funded capital improvements: roofs, windows, boilers and tuck pointing sf
o Building maintenance responsibilities will remain in house and each district will be capped at no more than one FTE per 150,000 sf with no more than 15% of staff working an AM shift, balance working evening when kids are not in school
o Custodial – Every building with more than 15,000 sf and at least 220 students must have one custodial porter from 11am to 7pm on school days
o Food service will be responsible for cafeteria cleaning and cleaning emergencies until swing shift arrives
o Operations and maintenance cannot exceed 8% of a districts annual budget and costs must be categorized into mandated and un-mandated activities

Todd
Thu, 11/15/2018 - 3:55pm

She has no logical or realistic way to pay for any of her campaign promises. This is going to be a big disappointment. It's sad that Detroit, who by the way is 47% illiterate, decides who leads the state. If voters had to pass an IQ test to vote, democrats would be in serious trouble. Detroit would no longer be deciding my future.

David Waymire
Fri, 11/16/2018 - 3:21pm

Hmmm. Looks like Democrats did best in highly educated area like Washtenaw, Oakland, Ingram, Kalamazoo and Kent counties. And Republicans did best in places where few college grads live. But hey...

Alex Sagady
Thu, 11/15/2018 - 5:03pm

The first thing Whitmer should cut is her proposal for a new Department of Great Lakes and Freshwater, since spreading natural resources and environmental protection over 3 departments of state government makes damage done to environmental programs by John Engler worse, costs more and decreases organizational efficiency.

If there is any state department that is a candidate for splitting up it is the Michigan Department of Health and Human Services. Let's split out the state health department as a standalone department like it used to be for decades, and let's makes sure it is headed by a physician, like we used to have with Maurice Reizen and Bailus Walker Jr.

Bill Hartwig
Thu, 11/15/2018 - 6:03pm

No one is talking about the increased social costs of dealing with marijuana increased usage.

Anonymous
Fri, 11/16/2018 - 7:41am

The new governor and legislature should consider offering state employees an early out. It's been more than 8 years since the last early out (the longest run without an early out in the past 35+ years). Early outs have worked in the past to save the state money.

I would recommend an 80-and-out (age + years of service) with a .25% added multiplier (bringing it to 1.75%) like they did in '97 and '02. If such an option was offered, I suspect the vast majority of long-term employees (who are still on the old pension plan and at the top of their respective pay scales) would decide to retire.

While it might increase pension costs initially, in the big picture of things, it would save the state money, allow the positions to be filled with new employees at the starting end of the pay scales (thus lower wage & benefits costs), and provide a more stable, fixed line-item in the state budget for pension costs - rather than continuing to deal with the unknowns about when employees with 30 or more years of service will retire.

I think it would be a major win-win.

Matt
Sat, 11/17/2018 - 10:57pm

Not to spoil the enjoyment of watching a bunch nonsensical promises turn to dust, but Michigan's tax systems needs real reform. Concentrating the entire sales tax on one small portion of purchases makes no sense. Especially when services make up the majority of all expenditures. Most states even tax food without massive starvation. Maybe look at an expenditure tax (at a lower over all rate) rather just hitting the few goods purchases we hit now? And not the crappy crony driven version Granholm tried to foist off. This could free up the sales tax on fuel to be used for the roads. Second area, rather than base property taxes on some subjective guess of what a building is worth, why not look into to tying property tax to the square footage and considered cost that the structure and its inhabitance place on the government unit? This stabilizes revenues and is much cheaper to administrate as it eliminates the entire assessment and equalization process. Not to propose higher taxes, but these could take off some pressure facing local and state governments, especially during a recession.