January 13, 2017

January Consensus Revenue Estimating Conference Results

Yesterday marked the official beginning of the FY2017-18 school budget season with the January Consensus Revenue Estimating Conference (CREC) taking place at the state Capitol. With ice covering the roads and school closures all around, school business officials were hoping for some warmer conditions as the state’s estimated revenues were being determined! You’ll be happy to hear that although the weather was cold outside, warmer temperatures prevailed with a slight uptick in revenues. However, the forecast of “partly to mostly cloudy with a slight chance of thunder snow” continues to prevail over the state economic outlook, and especially school aid.

Some of the Financial Details
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 the SFA and HFA preliminary numbers were released in the days and weeks leading up to the meeting. The final January numbers confirmed that the May 2016 CREC estimates were slightly conservative and a minor increase is in order. We have posted documents we’ve received on our webpage dedicated to the CREC.

The full implications of the FY2017-18 School Aid Budget won’t be known for some time, but as of today, it is certain that the overall revenue estimate we saw at the May 2016 CREC remained on track in January 2017.

In the final CREC agreement for the January 2017, the GF/GP estimate from May 2016 was increased $151.6 million for FY2016-17 but was decreased by $84.4 million for FY2017-18. Revenue for the FY2018-19 was unveiled only showing a .6 percent growth or $66.6 million above the estimated FY2017-18 level.

The May 2016 SAF estimates for FY2016-17 were increased by $54.6 million, totaling a $338.3 million increase over prior year revenues. FY2017-18 estimates were increase $22.3 million, totaling $326.1 million over FY2016-17, and FY2018-19 is slated to increase $348.4 million above the FY2017-18 level. The increases year over year represent growth at 2.8%, 2.6% and 2.7% for the three fiscal years respectively.

The question becomes whether the increase is enough to provide a foundation allowance increase or will it be used to increase categorical funding including those that are currently being prorated? The pressure on the GF/GP could also be an issue as that fund shows a slight reduction in estimated revenue from the May 2016 consensus, especially as we see the first look at FY2018-19 GF/GP estimates. The interaction between the two funds is certainly something we watch closely as the transfer of revenue from the GF/GP to the SAF has been a significant source of ongoing support for SAF programming.

The change in the revenue forecast was caused by several factors including:

  • increased income tax revenues
  • less Michigan Business Tax (MBT) refunds than expected
  • increased transfers for unclaimed property and liquor purchases
  • an increase in lottery revenue

Income tax refunds have increased but if you recall from our eblasts during the lame duck session, income tax refunds are fully absorbed by the GF/GP because it is the gross income tax revenues that are split between the GF/GP and SAF. This was a hot button issue for the Governor and Legislature last session and there were concerns that the SAF dedicated gross income tax revenue calculation would be changed to “net” income tax revenue, after refunds were paid. The estimated loss of revenue for the SAF would be $430 million if that change was enacted. Although the idea fell short of gaining enough support last session, legislative leaders indicated that the issue would be taken up again in this new legislative session.

Balance Sheet
The HFA estimated balance sheet shows the impact of the revenue agreement on the funds available for school aid. Some key areas to note include:

  • The GF/GP transfer to school aid is reduced for FY2017-18 due to the ending of the “one-time” funds of $162 million that helped soften the loss of revenues from the elimination of the HMO Use Tax. The GF/GP Grant for FY2017-18 is only $15 million for discretionary use! The funds are “replaced” by normal growth of the other revenue sources, leaving a limited ability to increase district funding in future years.
  • The HFA balance sheet includes a slight increase in expense of $5 million for the state portion of the MPSERS unfunded liability payment for FY2017-18 and an additional estimated $30 million expense in anticipation of a potential adjustment to the rate of investment return assumption that is used by MPSERS in their retirement rate development. Although there has been no decision to reduce the rate, the discussion that occurred during the lame duck session alluded to the possibility. A downward shift in the rate of return would cause a potential rate increase, impacting the unfunded liability and therefore the funding needed to pay down to the district capped rate of 20.96%.
  • The ongoing baseline expenditures include all categorical payments and foundation allowances as we know them today. There has been no projection for increases, just simply moving forward current law with adjustments for student projections.
  • FY2016-17 leaves $143.8 million in the coffers to carry to FY2017-18. Although positive, it represents a current year structural deficit of $24.4 million. FY2016-17 uses a portion of the $168.2 million carried over from FY2015-16 to make ends meet.
  • The estimate for FY2017-18 shows a structural surplus of over $97 million, leaving a final ending balance of $241 million at the end of FY2017-18.

The balance sheet represents the best high level estimate of revenues and ending balances based on yesterday’s consensus agreement. Depending on policy decisions, it appears that there are funds available to increase foundation allowances or possibly increase other categorical funding in FY2017-18! Caution though, spending more than $97 million of the $241 million projected ending balance will create a structural problem for FY2018-19.

The SFA balance sheet estimate is very similar to the HFA with the exception of the $30 million additional expense for a change in the retirement investment rate of return. That is not reflected in the SFA ending balance of $273.7 million for FY2017-18.  

First Step in the Budget Process
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 upward makes everyone feel a little better. Although things may look like they are generally getting better, there are other issues that may impact the SAF. The roads still need GF dollars through the next couple of years and although that may feel like a GF/GP issue, it could impact policy decisions on revenues for the SAF moving forward. The Governor’s proposed budget plans, scheduled to be released February 8, will give us a better indication of how he and his team are planning to deal with these issues, and how this might affect the SAF and your local district.

Pupil Estimates
The overall pupil estimates continue to decline annually.


  • Local district pupils were adjusted to 1,337,700 which is a 6,700 increase from May estimates
  • PSA pupils were adjusted to 153,000 which is a 500 student decrease from the May estimates
  • Comparing to FY2015-16, local districts are down 6,669 students and PSA students are up 1,389
  • Grand total for all pupils is 1,490,700


  • Local district pupils were adjusted to 1,336,500 which is a 17,500 increase from May estimates
  • PSA pupils were adjusted to 150,000 which is a 5,500 student decrease from the May estimates
  • Comparing to FY2016-17, local districts are down 1,200 students and PSA students are up 3,000
  • Grand total for all pupils is 1,486,500


  • Local district pupils are estimated to total 1,330,000
  • PSA pupils are estimated to total 152,000
  • Comparing to FY2017-18, local districts are down 6,500 students and PSA students are up 2,000
  • Grand total for all pupils is 1,482,000

It’s important to remember that year over year student numbers are still declining, but the unexpected positive change from May in the local district student numbers of 6,700 for FY2016-17 resulted from:

  • an increase in kindergarten students due to the expansion of Great Start Readiness Program enrollment age policies
  • transition of students to the Detroit Community School District who were previously counted in the PSA numbers
  • an increase in the number of students supported by shared-time agreements between public and non-public schools

Admittedly, these may be conservative student projections but the implementation and expansion of the above bullet points could have a negative impact on how much per pupil funding is available. The conservative approach is appropriate as underestimating the number of students would negatively impact the school aid fund.

Bottom Line and Other Considerations
The HFA Estimated Balance Sheet anticipates positive ending balances for both FY2016-17 and FY2017-18 of $143.8 million and $241 million respectively. This includes increases for potential MPSERS obligations of $35 million and a decrease in the GF/GP transfer of nearly $162 million.
Revenue estimates for the current and coming years show slow steady growth but there are issues to cause us concern:

  • Increases in income tax collections, lottery sales, unclaimed property transfer revenues and lower than anticipated MBT refunds aided in the revenue estimate increase. Will these continue?
  • The risk of a tax policy change in the distribution of income tax revenues could have a significant impact on estimated revenues and therefore is something to watch for in the legislative session. Watch out for the legislature to suggest a phase in approach that impacts multiple years!
  • Fewer student numbers are estimated for the next several years.
  • Policy changes to the MPSERS system, including a change to a defined contribution plan for new hires, could consume any increased funding “off the top” of the SAF to keep the district share of the unfunded liability at the 20.96% level!
  • Recently approved pay raises for State of Michigan employees of 3% for FY2017-18 and 2% for FY2018-19 may further strain the GF/GP.
  • Legislative rumblings to totally eliminate the State Income Tax.
  • GF/GP new funding commitments of over $700 million including roads, tax credits and other tax policy changes.
  • Federal fiscal and monetary policy uncertainty with the installing of a new Administration.

Remember, this is the beginning of the process. These numbers are subject to change as more financial information comes in throughout coming months. Given what we heard yesterday, assuming a foundation allowance increase might be premature. We’ll hear the Governor’s “State of the State” on January 17, as well as his budget proposal on February 8, and that will give us a better indication of where his priorities are for FY2017-18 and will give us a lot more detail on the estimated local impact.

Of course, the House and Senate will both have their chance to propose changes to the budget during the normal legislative process.

And don’t forget, there is the second Consensus Revenue Estimating Conference scheduled the third week of 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.

In the meantime, districts will have a lot of assumptions to be juggling when preparing their FY2017-18 budgets. What is hopefully obvious is that districts need to be conservative in budgeting and negotiating while the process unfolds. The closer we get to the Governor’s and Legislature’s generally self-imposed deadline to finalize the budget of June 1, the better the information.

We’ll have a detailed discussion about these revenue estimates and the impact on the SAF next week at the MSBO Financial Strategies Conference. There is still time to reserve your seat though our online registration process and get the best information at the right time to start your district budget process.

Stay Tuned!

David and Bob

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