Revenues on the rise… slowly!

Well it’s official, spring has sprung! Warmer temperatures, light evening rains and the smell of lilacs blooming in Michigan’s capitol city! For many in education, spring is also recognized by the coming of the May Consensus Revenue Estimating Conference (CREC) which took place this morning at the Capitol before a less than standing room only audience. In the past we have seen the CREC meetings draw much attention and anticipation from the school community and other interest groups as branches of our state government discuss and agree to projections of revenues available to fund the General Fund/General Purpose (GF/GP) and School Aid Fund (SAF) for the remainder of the current year and the next fiscal cycle. Although interest in the actual meeting may be dwindling, the results of the meeting will begin what is likely to be a battle between transportation funding in the GF/GP budget, funding the state portion of MPSERS (off the top of the SAF) and gaining additional revenues at the local level for Michigan schools.

We alerted you yesterday with the release of the Senate and House Fiscal estimates of revenue, which we have posted on our website on a page dedicated to the May 2013 CREC. We will continue to update and post information on this page as we receive it from various sources. What today’s agreement amounts to, is an increase in revenues for both the GF/GP and SAF for both 2012-13 and 2013-14 from the earlier January 2013 CREC.

Good news? Yes, but with some caution. The fact that more revenues are forecasted doesn’t necessarily mean more funding will be made available to districts as you wrap up one budget cycle and begin another. This situation is intensified by the debate over funding Michigan road improvements and the looming SAF budget implications of holding the Michigan Public Schools Retirement System (MPSERS) Accrued Unfunded Liability (AUL) to the statutory 20.96% level, which is estimated to cost the SAF over $160 million for 2012-13, $400 million in 2013-14 and $650 million in 2014-15!

What appears to be good news on the revenue side, will most likely be dampened by the funding being absorbed by this ever increasing cost of retirement and may well exhaust any additional funds that we would normally associate as supporting a per pupil foundation increase. It’s still too early to tell what the direction of the legislature may be, but for now, it’s important to use caution when you hear the state is projecting more revenues. With a legislative conference committee expected in the next few weeks to deal with the FY 2013-14 budget, we anticipate passing on more information as it becomes available to assist you in your planning. Please monitor our web page dedicated to the FY 2013-14 budget process.

By the numbers……..
For those of you that like numbers, here’s a quick comparison of the consensus revenues and the difference between the January 2013 and May 2013 CREC net revenues:

FY 2012-13 (in millions)

FY 2013-14 (in millions)

FY 2014-15 (in millions)

Both funds show an increase in projected revenues, totaling $482.6 million for 2012-13, $219.4 million for 2013-14 and $244.2 million for 2014-15.

As you can see by the charts above, the consensus is that there is more funding available than earlier estimates and now the challenge for the legislature to determine how those additional funds will be used to support both the GF/GP and SAF. Once again we expect that a conference committee will be established in the next week or two and negotiations to reconcile the House passed, Senate passed and the Governors’ budget proposal all of which are posted on our website.

Details, details…….
Here are some highlights of the Michigan forecast details in a “Bottom Line” format:

Jobs and Employment:

• Michigan’s employment was steady for the last half of 2012
• Michigan’s unemployment rate (8.5%) is improving at a faster pace than the US rate (7.5%)
• Real estate activity has positive growth and housing starts are on the rise
• Although the “Detroit 3’s” market share hovers at 45%, national light vehicle sales are expected to inch up to 16.2 million units by 2015 from 14.4 million units in 2012
• Michigan’s vehicle employment is expected to grow, but slowly
• Inflation remains steady and low over the forecast period
• Michigan job gains will grow at a declining rate and job growth will be mostly in the private service sector

Net Tax Revenues:

• Net income tax revenue is expected to grow slightly over the forecast period ($8.1 billion in 2013 to $8.5 billion in 2015; compared to $6.92 billion for 2012)
• Net sales tax revenue is expected to grow slightly over the forecast period ($7.1 billion in 2013 to $7.5 billion in 2015; compared to $6.95 billion for 2012)
• Net MBT/CIT revenue is somewhat stable over the forecast period ($400 million in 2013 to $430 million in 2015; compared to $1.36 billion for 2012)
• Net SET revenue is somewhat stable over the forecast period ($1.8 billion in 2013 to $1.85 billion in 2015; compared to $1.79 billion for 2012)
  (Take notice of the shift in net revenues from MBT/CIT to Income Taxes due to tax structural changes from 2012 to the forecast period)

GF/GP and SAF Revenues:

• GF/GP net revenue grows slightly ($9.19 billion in 2013 to $9.84 billion in 2015; compared to $9.29 billion for 2012)

• SAF net revenue grows slightly ($11.2 billion in 2013 to $11.8 billion in 2015; compared to $10.88 billion for 2012)

As you can see in the details, things are positive, which is a good thing! The fact still remains that the use of the “extra” funds may not necessarily make it down to the district level. One area that we noted in our analysis of the Governor’s budget back in our February 2013 eblast, the Governor is using $250 million in MPSERS reserve funds to support his two-year budget, but the fund will only have $174 million available. This leaves a $76 million hole that will need to be filled to support the MPSERS buy down of the AUL to 20.96%. With an increased revenue estimate of over $85 million for 2012-13, it would make funding that $76 million shortfall pretty easy! Also, a portion of the increased revenues are considered one-time and not building the base. We are hearing that those one-time revenues should not be added to the foundation allowance. Again, we will have to wait and see where the legislature goes in their negotiations on the FY 2013-14 budget.

As usual, please check our web pages regularly for the latest information on the budget process. We will keep you up to date and informed with eblasts as this budget debate proceeds.

Please note:

Speaking of MPSERS, we expect that you will have to record both revenue and expense for the Section 147(c) MPSERS rate buy down that is coming “off the top” of the SAF. While the supplemental appropriation of 2012-13 has not yet been passed by the legislature, we expect it to be and you will need to adjust your 2012-13 budget for your share of the $160 million. A quick estimate would be about 2% of your MPSERS related payroll. MDE and the 1022 Committee are working on this issue to provide more direction, but we want to make sure you amend your 2012-13 budget for this development (and include a similar budgeted item for 2013-14 for the $400 million number or about 5%). Otherwise you could risk an audit finding for overspending your budget. The committee is expected to meet on June 4th, just in time to be discussed at the Business Manager/CPA Conference on June 5.