January Consensus Revenue Estimating Conference Results

Today marks the official beginning of the FY 2015-16 budget season with the January Consensus Revenue Estimating Conference (CREC) taking place this morning at the state Capitol!  With record low temperatures being reported earlier in the week, school business officials were hoping for “warmer climate” conditions as the state estimated revenues were being discussed!  Unfortunately, you can save the sunscreen for Spring Break as the “mostly cloudy” sky continues to prevail over the state economic forecast.

The full implications of the FY 2015-16 budget are still unclear but at this time, it is certain that the overall lowering of revenue estimated from the May 2014 CREC is a cause for concern!    

Representatives from the House Fiscal Agency (HFA), Senate Fiscal Agency (SFA) and the Administration met to agree on state funding estimates for General Fund/General Purpose (GF/GP) and the School Aid Fund (SAF). The Administration shared their estimate at the meeting and combined with SFA and HFA preliminary numbers that were released in the weeks leading up to the meeting, the final January numbers confirmed that the May 2014 CREC estimates were too high.  We have posted all of the information received at the meeting today on our webpage.     

In the final agreement for the January 2015 CREC, the May 2014 GF/GP estimate was reduced $324.6 million for FY 2014-15 and $532.1 million for FY 2015-16.  Revenue for the FY 2016-17 fiscal year was unveiled showing a 3.0 percent growth or $287.4 million above the FY 2015-16 level.     

The SAF estimates were increased slightly by $35.8 million for FY 2014-15 and $5.6 million for FY 2015-16.  Revenue for FY 2016-17 is slated to increase by 3.1 percent or $377.2 million for FY 2016-17.  Even though the overall net estimates were reduced, both funds will see increasing revenue year-over-year.

Why the big change in the GF/GP? The bottom line issue facing the GF/GP is the certification of Michigan Business Tax (MBT) credits that have been on the books since 2011 and are now being claimed by businesses.  The projections for FY 2015 MBT net refunds are expected to total $681 million, $252 million larger than the May estimate!  In FY 2016, MBT net refunds will total an estimated $807 million, $351 million larger than estimated in May!  What’s worse is the cost of current credits is expected to increase over the next few years. According to the SFA estimated balance sheet, these effects on the general fund put the ending balance for FY 2015 at a negative $330 million and a negative $382.9 million for FY 2016 unless GF expenditure reductions are put into place. 

The SAF on the other hand is looking fairly healthy.  The final ending balance as shown on the HFA estimated balance sheet is $473.1 million coming into the FY 2014-15 year and ending with $292.8 million! The FY 2015-16 ending balance is $517 million!  Although that looks very positive, the GF/GP going negative may end up being the SAF’s problem! As we’ve seen in the past, a reduction in the GF/GP transfer to the SAF or the shifting of responsibility for expenditures from GF/GP to SAF could be proposed solutions, further reducing funds available for K-12 and ISD operations. It would appear that GF/GP expenditure adjustments would be needed in current and future years to bring the GF/GP back into balance. 
        
We can’t stress enough that the January CREC is simply one of the first steps in the budget process and the fact that revenues are being revised downward makes everyone a little uneasy.  There’s no need to sound the alarm yet, but consider tempering the negative press surrounding the downward revenue revision with the fact that the SAF revenues continue to increase year-over-year, just at a lesser pace.  Remember, just because there may be fewer funds available than was estimated in May 2014, does not automatically mean there will be an adverse impact to schools.  We’ll have to wait and see how the Administration deals with the GF/GP issues before we jump to conclusions!

Pupil estimates…
While the overall pupil estimates continue to decline yearly, the transition from the local districts to public school academies is estimated to continue at a somewhat significant rate. Estimates for FY 2015-16 show a total of 1,336,000 attending local districts and 159,000 attending public school academies. This equates to a 5.1% increase in public school academy attendance from the FY 2014-15 estimate of 1,356,700 local district students and 151,300 public school academy students. The FY 2016-17 estimates continue that trend with 1,317,000 attending local districts and 164,000 attending public school academies.  But as you can see there continues to be fewer students estimated overall each year with no clear end to this trend in sight.

Ballot Proposal and Balance Sheet   

You may be asking “What does this CREC have to do with the ballot proposal in May 2015 and how is that reflected in the SAF estimated balance sheet?” 

Great question! Today’s CREC is a snapshot of the “best guess” of revenues available based on the current law. The ballot proposal, which would increase sales and use tax by 1 percent with specific earmarking, would certainly change the numbers that were agreed to today.  Although the estimated impact of the proposal on the SAF would be nearly $300 million to the positive, the current CREC doesn’t reflect those increased revenues because it is not currently law. 

In reviewing the January CREC estimated balance sheet as presented by the HFA, an area that we pay special attention to is the “on-going” appropriations vs. the “one-time” appropriations.  Many of the recently added categorical funds are termed as “one-time.”  That’s important as you begin to build you budget, you’ll need to pay special attention to be sure you understand what is being talked about as ongoing and one-time.  As of now, it looks like the funds being generated in the SAF would allow for the continuation of the current categorical funds for FY 2015-16, including the increase to “buy down” the MPSERS rate, and still have an additional $517 million to carry forward into FY 2016-17!     

Bottom Line
Never has generally good news left us feeling so uneasy. The SAF revenues look strong, especially when compared to the GF/GP revenues.  But the temptation to assume a foundation allowance increase is probably the last thing you want to do at this time.  There will be a few points over the next five months where we will be able to improve our guesses and narrow the unknowns that are running rampant right now.

The State of the State on January 20 will provide a little insight but we are not expecting much in the way of news that removes this uneasy feeling.

The release of the Governor’s budget sometime during the first couple weeks of February will be the first time we expect to see some of the “writing on the wall.”  Will the Governor propose a budget that reflects the passage of the Proposal 1 Road Funding ballot question? Or will he release a budget that ignores the ballot question? Of course there could be dueling budget proposals to show both scenarios of what would happen in either case.

The special election slated for early May will certainly bring some definition to variables we will be debating over the next five months. If Proposal 1 passes, there is an estimated additional $300 million for the School Aid Fund. We could sure use those dollars in an increased foundation allowance. But is that where the Legislature will choose to apply those dollars or will they double down on the paying off the MPSERS liability?

And finally, there is the second Consensus Revenue Estimating Conference that will be held in May.  That estimate will hopefully bring all the variables together so that we can truly see the revenues available to the GF/GP and to the SAF. At that point, the Legislature and Governor should be able to finalize the budget, pass it, and then allow districts to do the same for their budgets.

What might not be too obvious is with the General Fund as much as $712.9 million short combining this fiscal year and next, and the School Aid Fund looking pretty good, tapping the SAF surplus could be just the quick fix the Governor needs to fill the budget hole.  And that could happen with or without Proposal 1 passing.

In the meantime, districts will have a lot of assumptions to be juggling when preparing their FY 2015-16 budgets. What is hopefully obvious is that districts need to be conservative in budgeting and negotiating. 

So, we suppose that is a lengthy bottom line discussion, but this year we will be waiting a long time before we will have enough solid information to feel we can start to finalize budgets.

David and Bob