May 16, 2018

May CREC: More Funds Available for the School Aid Fund

Spring has finally sprung and temperatures are on the rise!  Great news for outdoor enthusiasts, great news for the state’s General Fund/General Purpose (GF/GP), and likewise for School Aid Fund (SAF) revenues!  The May Consensus Revenue Estimating Conference (CREC) is a critical part of the annual budget process and today the participants consented to MORE AVAILABLE REVENUES THAN ANTICIPATED in January! Representatives from the Administration, Senate and House met this morning under a sunny sky and the temperature of revenue forecasts “heated up” the Capitol. 

After a generally good revenue picture at the January 2018 CREC, the estimates for both GF/GP and SAF have been increased due to a continued positive economic outlook. This is good news for the FY2018-19 SAF budget which has a significant increase to the Foundation Allowance of up to $240 included in both the Administration and House proposals, which we were not sure we could afford without cuts to shared time and cyber schools!  Now that the CREC is completed, the legislature and Governor have the information they need to move forward with the setting of budget targets and to compromise on the budget. Depending on the timing of a conference committee for School Aid, we assume we will see a final budget in the early part of June.

The Revenues

The revenue forecasts for GF/GP and SAF have both been adjusted upward from the January 2018 CREC, but that doesn’t necessarily equate to more revenues year-over-year. 

The change in GF/GP settled at a 2.6% increase in funding for FY2018 over the FY2017 final amount, which equates to a $268.1 million increase.  However, FY2019 GF/GP shows stagnant revenues as the estimated total is 0.5% less than the prior year, or a decrease of $52 million.  FY2020 GF/GP is expected to grow at 1.0%, or 107.1 million over FY2019.  In total, the CREC increased GF/GP a grand total of $323.2 million for the FY2018-20 period.

The SAF fared better with an increase of 4.4% for FY2018 over the final FY2017 totals, which equates to $558.9 million.  FY2019 continues the increase by 2.5%, or $330.4 million. The final year in the estimate, FY2020, is estimated to increase 2.4%, or $326.4 million above the FY2019 estimate.  In total, the CREC estimates an additional $1.2 billion in funding for the FY2018-20 period.

Why the projected increase in revenues? One of the leading factors is an increase in the rate of inflation and the effects it has on sales tax, School Education Tax (SET) and individual income tax.  An increase in inflation drives higher wages and higher sales/use tax revenue, and a higher taxable value cap number for calculating SET. These forces have a direct impact on the ongoing revenues of the GF/GP and SAF, and the compounding effect in the following years as well.  The increases projected today in FY2017-18, FY2018-19 and FY2019-20 can all be traced to the estimated inflationary impact as well as strong collections in the income tax, and solid sales and use tax growth in the future.

See the “Net Revenue Estimates” on Table 1 of the Consensus Revenue Agreement Executive Summary for details on the changes in revenues year-over-year and between the January 2018 and May 2018 estimates.

This is a very positive outlook, but this revenue estimate comes with some risk including the impact of international trade policy uncertainty, the Fed’s monetary policy if inflation pressures appear, and how the housing market will respond to potentially higher interest rates on home loans. 

Pupil Estimates

The CREC includes an estimate of the number of pupils.  Pupil counts were adjusted slightly upward from the January figures, however the overall decline in student population is expected to continue over the FY2018-19 and FY2019-20 school years. The net increase from the January pupil estimates are 1,500 for FY2017-18; 1,500 for FY2018-19; and 1,000 for FY2019-20. Total pupil counts for the three fiscal years are estimated at 1,485,000, 1,480,000 and 1,476,000 respectively. Small shifts from local districts to PSAs are expected to continue for the foreseeable future.   

The Bottom Line

Today’s CREC tells us there is more funding available for both the GF/GP and the SAF.  Looking at the House Fiscal Agency Estimated SAF balance sheet, we see there is enough funding available to afford any of the three 2018-19 budget proposals, even the House version which allocates nearly $90 million more than the Administration and Senate versions. Depending on final budgets posted, funds carried forward from 2018-19 into 2019-20 could be about $280 million in the SAF. That’s good news for a budget that allocates more funding for the foundation allowance and maintains many of the additional funding provisions from the previous budget.  We won’t know until the budget is completed, but things are lining up nicely for a budget with increased revenue to educate students!

All the documents from today’s meeting are posted on our web page dedicated to the CREC.

What’s next?

With additional funds coming from this CREC, we could see some additional allocations for existing and new programs, reduced transfers from the GF, or just letting the increased funds drop to the bottom line. We are sure the Governor will want to leave a Budget Stabilization Fund with at least $1 billion as a point of pride for his administration, which could use up $100 + million. We want to see the state invest in the education of Michigan’s children now, but balanced with what will be needed for the children we will be educating in the future.

We will continue to monitor the budget process, which includes:

  • Setting budget targets
  • Passing budget bills
  • House and Senate leadership will need to work with the Governor on a compromise School Aid Bill
  • Conference Committee will need to adopt the compromise School Aid Bill
  • House and Senate will need to take an up or down vote (no amendments allowed)
  • Governor will need to sign the bill with or without vetoes

We will continue to provide updates, but for now it seems that the economic recovery, albeit gradual, is having a positive impact on state resources.  Stay tuned for more!

David and Bob

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