Michigan Juggles Options for Dealing With Budget Crunch

As the slowing economy continues to crimp tax revenue, Michigan lawmakers are grappling with belt-tightening decisions that few expected to make just six months ago.

They are hopeful that the state will avoid drastic cuts, but the process so far hasn’t been easy. And while the Legislature makes progress on budget cuts, it may take an executive order from Republican Gov. John Engler to bring swift action.

Budget problems facing Michigan have escalated this year, with state economists estimating that tax revenues will be $590 million less than forecast in January for the 2001 fiscal year, which ends Sept. 30. Furthermore, 2002 revenues also are expected to suffer.

“We’re going through an economic downturn for longer than anyone could have anticipated,” said Kelly Chesney, spokeswoman for the Michigan Department of Management and Budget. “We need to lower our spending and bring it more in line with longer-term revenue.”

Michigan’s most-prominent industry is straining, with layoffs at major automobile makers; auto sales are expected to be down seven percent this year. “Most people would argue that the manufacturing sector of the economy has been in recession,” said Arturo Perez, senior policy specialist with the National Conference of State Legislatures. “The more states rely on that sector, the more they will be impacted.”

Although the weak economy is seen as the biggest problem, others such as Sen. Alma Wheeler Smith, the ranking Democrat on the appropriations committee, also see blame elsewhere. She says tax cuts and exuberance among lawmakers when they had money to spend a year ago helped put the state where it is today.

“For the coming fiscal year I hope we’re not seeing that much of a revenue loss,” Sen. Smith said. “If the economy doesn’t turn around soon, by July, I would say that we should take a good hard look at delaying the tax cut for 2002.”

Michigan isn’t alone in facing a budget crunch. States from New Jersey to California are being hit hard by the economic slowdown, and Ohio, Indiana, Kentucky and Illinois share Michigan’s ties to the manufacturing sector. The updated budget proposals in Michigan reflect those being made nationwide.With the latest revenue forecasts, Michigan found itself about $550 million short on its 2001 general-fund budget. To make up for the shortfall, state agencies have been asked to trim their spending, a hiring freeze is in place, and about $300 million is expected to come from cuts. Money left over from 2000 likely will help make up the difference.

The Republican-controlled House last week (5/24) approved a 2001 supplemental budget, but it was short of the two-thirds vote needed to make the cuts immediate. If passed by the Senate, the bill would take effect 90 days after the Legislature adjourns in June, but Gov. Engler has indicated he would issue an order to cut spending if action wasn’t prompt.

Meanwhile, state officials are looking ahead to the 2002 general-fund budget, which is expected to be about $500 million short, as well as the two-year school-aid budget, which is seen showing a $600 million shortfall. How deep the cuts will be depends on the uncertain prospect of how quickly the economy rebounds.

“We’re looking at reducing spending as little as possible and trying to preserve and protect as much of our programming and as much of our essential state services as possible,” Ms. Chesney said.

On the whole, Ms. Chesney said Michigan is well prepared to face the strain. During the good times of the late 1990s, the state attempted to keep a lid on base spending. It also concentrated on one-time investments in infrastructure, built up its $1.2 billion rainy-day fund and saw its business diversify into the technology and biotechnology sectors.

Other options remain if the economic situation deteriorates. The rainy-day fund is one possible helping hand, but it remains a point of contention. Some would like to see it fill gaps in the 2001 budget and bolster the 2002 budget, but others argue that the current shortfall doesn’t justify its use. The state also could delay tax cuts scheduled for 2002, but any simulative effect on the economy would be lost at the expense of increased revenue.