February 20, 1998

Governor’s FY 1998–99 State Budget

by Robert Kleine, Vice President and Senior Economist

Last week Governor Engler released his budget recommendations for FY 1998–99. His general fund/general fund (GF/GP) recommendation of $8,772.7 million is up only 2 percent from FY 1997–98, the smallest increase he has recommended. The total budget recommendation of $31,992.5 million is up 3 percent, largely due to a 7.4 percent increase in federal funds. Of the $548.8 million increase expected in federal funds, about 88 percent is in four departments—Transportation, Community Health, Family Independence Agency, and Michigan Jobs Commission. Transportation is projected to receive a $200 million, or a 37.6 percent, increase, due in part to the increase in the gas tax, which will bring more matching funds to Michigan, and expected changes in the federal allocation formula.

The recommended increases for the major program areas are shown in the exhibit. The largest dollar increases are for law enforcement, school aid, and community health. Only six departments or program areas would receive an increase in excess of the projected inflation rate of 2.6 percent: Agriculture (12 percent), school aid (11.3 percent), Environmental Quality (7.1 percent), State (4.5 percent), Corrections (4.2 percent), and Attorney General (3.8 percent).

The large increase for Agriculture is due to a $3.5 million expansion of Project GREEEN (Generating Research and Extension to meet Economic and Environmental Needs), a joint initiative between Michigan State University and the Department of Agriculture designed to find solutions to preserve environmental quality while maintaining the safety of Michigan’s food supply.

Environmental Quality would receive an additional $5.7 million in GF/GP funds for cleanup of contaminated sites; this replaces a decline in restricted settlement revenues (from judgments against polluters). (The total budget recommendation for the department is down 1.9 percent from FY 1997–98).

The Department of State would receive additional funds for programs aimed at improving customer service.

The increase for Corrections is quite modest by historical standards. Most of the additional funds are needed to fully fund expansion of prison capacity for 1998 and to cover additional beds for 1999.

The above–average increase for the Attorney General would finance a Native American legal services program ($.24 million GF/GP) and updates in technology ($0.3 million).

The school aid budget includes an additional $22.9 million for school districts that choose to be part of a regional career preparation delivery system and a $17.8 million GF/GP increase in the supplement to the School Aid Fund. The total school aid budget is recommended at $9.1 billion, up 2 percent.

Reductions in FY 1998–99 are recommended for six departments or program areas. The largest is an $8.8 million, or 12.9 percent, cut for the Department of Treasury. This decline is due to the proposed elimination of the $10.2 million community policing program, an item just added in the FY 1997–98 budget. The total Treasury budget is up 1.8 percent.  The Michigan Jobs Commission budget is down 2.3 percent due largely to the replacement of $3.5 million in GF/GP monies with restricted funds to run the state’s 13 welcome centers. The total Jobs Commission budget is up 9.9 percent, with $30 million recommended for the new Welfare to Work program.

The most controversial recommendation is for higher education. The recommended increase for universities (including financial aid) was only 1.6 percent, and community colleges received no increase for operations (additional funds are proposed for financial aid and the Tuition Incentive Program). The administration’s rationale for this small increase is that (1) from 1990 to 1998, universities received an annual average increase of 3.9 percent, above the inflation rate of 2.8 percent; (2) several universities (Central Michigan, Eastern Michigan, Ferris State, Northern Michigan, Western Michigan, Michigan Technological, and Lake Superior) all have employees who are members of the Public School Employees’ Retirement System and will save a combined total of $6.2 million in retirement costs due to pension reforms enacted last year; and (3) community colleges will save $15.8 million in retirement costs due to the pension reforms, which equals a 5.8 percent increase in the appropriation (5.4 percent adjusted for a change in the payment schedule); the colleges also received a like amount of savings in the current fiscal year.

The FY 1998–99 budget assumes a moderate slowdown in economic growth. U.S. real Gross Domestic Product is expected to increase 2.5 percent in 1998 and 2.8 percent in 1999, down from 3.8 percent in 1997. Michigan real personal income is projected to increase 2.2 percent in 1998 and 1.6 percent in 1999 compared with 2.1 percent in 1997. Motor vehicle sales are forecast to remain flat in 1998 and 1999.

General fund and school aid fund revenue increased 4.7 percent in FY 1996–97. The forecast for FY 1997–98 is for a 4.3 percent increase before tax cuts and a 3.4 percent increase after tax cuts and adjustments. For FY 1998–99, general fund and school aid fund revenue growth is forecast at 3.8 percent before tax cuts and 2.9 percent after tax cuts and adjustments (amounting to about $315 million, up from about $143 million in FY 1997–98).