With the state headed toward losing 25 percent of its jobs over the past decade, revenues for the 2009-10 year will plunge significantly compared to the already gloomy January outlook, economic forecasts by the Senate Fiscal Agency and House Fiscal Agency show.
The SFA forecast revenues would drop another $2.1 billion from January estimates, while HFA predicted total revenue declines of another $1.5 billion.
And the SFA report also says the deep revenue losses indicate the state will not be able to continue in the upcoming 2009-10 budget the current school aid foundation allowance absent a tax increase.
The SFA report says there will be a general fund deficit of $1.5 billion and School Aid Fund deficit of $948.3 million in 2009-10 based on current spending recommendations.
The SFA report says the general fund will have lost $2.6 billion in two years, or a 28 percent drop, with the estimate for next year alone dropping 9.3 percent to $6.7 billion. For the 2009-10 fiscal year, HFA less pessimistic outlook shows general fund revenues will fall by 5.9 percent, or $440.2 million, to $7.1 billion.
School Aid Fund revenues will drop 5.1 percent to $10.3 billion, the SFA report says. The HFA said School Aid Fund revenues would dip 3.4 percent to $10.57 billion.
Both general fund revenues and school aid fund baseline revenues, which exclude tax changes, will be below the levels reached in 1999-2000, the SFA report noted.
"Are they astounding?" SFA Director Gary Olson said of the loss. "I never thought I would see that kind of decline."
The reports also confirm the problems facing the current year, setting the revenue loss at $1.3 billion from the January estimate, a loss that has been factored in already in the budget balancing moves already approved.
Executive order reductions cut $304 million from the general fund, and the state is using $1 billion in federal stimulus money to balance the current year budget. It has another $949 million in federal stimulus funds available for 2009-10.
But Mr. Olson said the prudent approach would be to use a mix of federal funds and cuts to balance the budget in order to avoid a sharp fall-off in available funds in the 2010-11 year when the state economy should be leveling off. "We shouldn't be spending the full $949 million in '09-10 or you create an insurmountable problem (in 2010-11)," he said.
Mr. Olson said legislators will be facing a decision as they work on the upcoming school aid budget on whether to cut categorical programs to preserve as much of the foundation allowance as possible since revenues will not be able to support both at current levels. The largest categorical is at-risk programs, but that may not be able to be cut because of restrictions tied to the federal stimulus funds, followed by special education, which is constitutionally protected.
Federal stimulus funds for 2010-11 will only be $239 million, which would mean a loss to the general fund of $923.9 million if all of the available stimulus money is used in 2009-10, the SFA report said. A similar cliff would face the School Aid Fund.
"The challenge facing the governor and the Legislature in crafting an FY 2009-10 State budget is to develop a multiyear approach to the budget that will stretch a significant amount of Federal ARRA funding into FY 2010-11. This approach will require large reductions in FY 2009-10 appropriations beyond the significant reductions already included in the governor's budget recommendation," the SFA report said. "The governor's and the Legislature's ability to meet this challenge likely will set the stage for a state budget in future fiscal years that looks very different from the budget currently in place."
While the national economy may bottom out by the end of this year, Michigan's economy will continue to slide through the end of next year, the SFA report said. The record lows in light vehicle sales and housing starts reflect a national economic collapse that is "vastly more severe than any economic contraction in the last 60 years," the report said.
"There's not a comparable decade to these numbers," Mr. Olson said of the projected job losses from June 2000 through 2010. "This is generally a worst-case scenario, but it's the scenario we think is likely."
All major tax sources are expected to continue to post declining rates of growth through 2009-10, and are worse than had been projected in January.
The two largest general fund sources are the income tax, which will drop 19.4 percent to $3.36 billion from the current year, and the business tax that will drop 2.6 percent to $1.57 billion, according to the SFA. The HFA predicts income taxes will fall by 13.1 percent to $3.6 billion and the business and insurance taxes will increase by 3.9 percent to $1.85 billion.
HFA also estimates sales and use tax revenue dedicated to the general fund will increase by 6.5 percent to $854.6 million, while money to the School Aid Fund will decrease by 1.9 percent to $4.8 billion.
The HFA report notes the state will not likely carry any money from the current fiscal year into next year and the Budget Stabilization Fund continues to hover at $2 million.
The income tax revenue is further undercut by the next phase of the earned income tax credit, SFA noted, which will be worth $320 million in 2009-10 compared to $145 million in the current year, and business tax revenue will be further cut by the film credit program, which the report says will mean a loss of $131.3 million, compared to $88.4 million in the current year. In 2008, the state approved $48 million in credits.
The SFA report projects an unemployment rate of 9.2 percent this calendar year, up from 5.8 percent last year, rising to 10.6 percent in 2010. The HFA report indicated unemployment could peak at 14.7 percent in the first quarter of 2010.
The job loss that had been running at about 1.5 percent a year will accelerate to 8.8 percent this year and 7.2 percent in 2010, the SFA report says. Real personal income will fall 3.4 percent this year and 6.1 percent in 2010. The collapse of sales, a falling market share and higher productivity are all factors in the job losses in Michigan that primarily are tied to the auto industry.
HFA noted personal consumption is down because of the decline in housing and financial wealth, job losses and tight credit.
The analysis does assume continued downsizing of the Detroit Three carmakers, particularly Chrysler and General Motors, but not liquidation even if GM also goes into bankruptcy.
"Primary risks associated with these bankruptcies include the impact on consumers (will they purchase enough vehicles?), the supplier base, and the dealers," the HFA report noted.
The reports acknowledge a variety of unknowns still facing the economy, with potential weaknesses in the housing market and how that affects consumer behavior and credit markets, how wealth, borrowing and investment are affected by aversion to the financial markets, the fate of the value of the dollar in international markets, and the degree of consumer savings