May 17, 2017

May Consensus Revenue Estimating Conference Results

The May Consensus Revenue Estimating Conference (CREC) took place today at the state Capitol. The forecast for revenues is like the weather forecasts we sometimes see in Michigan. There will be sun and clouds with a chance of showers for School Aid Fund (SAF) revenues, but for the General Fund/General Purpose (GF/GP) revenues, it’s more like a rainy day. Although a consistent trend of revenue increases is still expected for the SAF, the GF/GP may have significant issues now and into in the future, resulting in possible budget pressures in both funds.

Representatives from the House Fiscal Agency (HFA), Senate Fiscal Agency (SFA), and the Administration met to agree on state revenue estimates for GF/GP and SAF. The Administration shared their estimate at the meeting and the SFA and HFA released their reports earlier this week. The final May 2017 numbers confirmed that the January 2017 CREC estimates were slightly conservative for the SAF with increases in order for all three years, FY2016-17, FY2017-18, and FY2018-19. But the GF/GP saw revenue reductions in each of the three years. We have posted documents on our webpage dedicated to the CREC.

The implications of the revenue conference on the FY2017-18 School Aid Fund Budget will be determined in the coming weeks, but it’s fair to say that from a revenue perspective, all three versions of the SAF budget seem to be affordable, those budgets being the Governor’s proposal, the House passed version, and the Senate passed version. Actually, there is room for a larger foundation allowance increase. The question is, will the Governor and Legislature raid the SAF again?

Some of the Financial Details

General Fund/General Purpose: In the final CREC agreement for May 2017, the GF/GP estimate from January 2017 was decreased $178.8 million for FY2016-17. This makes the adjusted total revenue estimate $10,111.3 for FY2016-17. FY2017-18 estimated revenues have a similar trend, decreasing by $114.1 million, totaling $10,408.6 million. Revenues for FY2018-19 were also decreased by $99.8 million from the January 2017 estimate, totaling $10,489.5 million. The overall decrease amounts to almost $400 million in GF/GP revenues over the three years. Even though there is a decrease for each year from the January estimate, there is year over year growth of 0.9%, 2.9% and 0.8% for the three fiscal years respectively. Concerning to say the least!

School Aid Fund: From the SAF perspective, the January 2017 revenue estimates for FY2016-17 were increased by $152.9 million, totaling a $12,609.9 million. FY2017-18 estimates were also increased $187.4 million, totaling $12,970.5 million. The FY2018-19 estimate is slated to increase $199.0 million above the January 2017 projection for a total of $13,330.5 million. The increases year over year represent growth at 4.1%, 2.9% and 2.8% for the three fiscal years respectively. Much better than the GF/GP.

Here are some of the factors that caused the January 2017 estimates to change:

• Weaker than anticipated withholding and annual income tax collections
• Growth in sales tax collections has improved in FY2016-17 after two weak years
• Corporate Income Tax and Michigan Business Tax collections are weaker than expected as business taxes show volatility for both economic and non-economic reasons
• Transportation earmarks and homestead property tax credit changes reduce GF/GP in FY2018-19

Some potential revenue risks that were identified in the May CREC final analysis:

• Federal fiscal and monetary policy uncertainty with the new administration
• International economics uncertainty; trade policy; exchange rate fluctuations
• Housing market response to higher interest rates
• Business tax volatility

Balance Sheet

The HFA estimated balance sheet shows the impact of the revenue agreement on the funds available for school aid along with the three different budget versions of the costs related to the SAF. Some key areas to note include:

• The GF/GP Grant to the SAF for FY2017-18 is estimated to range from $195 million to $215 million. This represents a slight decrease in assistance from the prior year. With potential revenue problems in the GF/GP, the SAF could see a significant reduction in this source of SAF revenue.
• The HMO Use Tax ends after 2016-17 and there the elimination of the remaining $61 million of revenue.
• All three budgets reflect the SAF fully funding community colleges, increasing the cost to the SAF by $134.7 million, for a total of $395.1 million. Funding for universities remains basically at the same level, $235.6 million.

FY2016-17 leaves $304 million in the SAF fund balance to carry to FY2017-18, reflecting a net increase of $136 million. With there still being three budget bills in consideration, the estimate for FY2017-18 shows a structural surplus of between $44 million and $52 million, leaving an estimated fund balance of between $347 million and $355 million at the end of FY2017-18.

The balance sheet represents the best high level estimate of revenues and ending fund balances based on today’s consensus agreement and the varying versions of the SAF budget. Depending on policy decisions, it appears that there are funds available to satisfy the budget proposals we have seen from the House and Senate, but with the GF/GP seemingly with a revenue hole to fill, there is no clear direction in how the GF/GP deficits will be addressed. Time will tell if those decisions will impact the SAF, but there is certainly cause for concern.

Closer to the End of the Budget Process

With the completion of the May 2017 CREC, the budget process can now move more quickly. With points of difference between the Governor, Senate and House proposals, we expect budget targets to be set and the conference committee to begin the negotiation of the remaining differences. With June quickly approaching, the Governor’s self-imposed June 1 deadline for the budget might be too optimistic. Plus, recent discussions regarding closing the MPSERS system and implementing a 401K style plan for new hires could very well slow the final budget agreement. The reduced GF/GP revenue estimates could put a damper on the momentum the MPSERS issue seems to have. Of course, the additional revenues in the SAF could be a target for that purpose as well.

Pupil Estimates

The May 2017 CREC pupil estimates continue to decline annually. For the first time in recent memory, the pupil estimates are UNCHANGED from the January estimating conference. Here are the details of the final numbers for May 2017.

FY2016-17

• Local district pupil estimates were adjusted to 1,337,700
• PSA pupil estimates were adjusted to 153,000
• Comparing to FY2015-16, local district pupil count estimates are down 6,669 students and PSA students are up 1,389
• Grand total for all pupils is 1,490,700

FY2017-18

• Local district pupil estimates were adjusted to 1,336,500
• PSA pupil estimates were adjusted to 150,000
• Comparing to FY2016-17, local district pupil count estimates are down 1,200 students and PSA students are down 3,000
• Grand total for all pupils is 1,486,500

FY2018-19

• Local district pupils are estimated to total 1,330,000
• PSA pupils are estimated to total 152,000
• Comparing to FY2017-18, local district pupil count estimates 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. With lower numbers of students, the pressure on the SAF for foundation dollars is lessened, but the constant desire to increase categorical funding such as At-Risk, use more funds to contain MPSERS costs, or increase the expenditure transfer from GF/GP to SAF for community colleges and universities would most likely deplete any remaining available revenues. Although the estimates may be on the conservative side, it’s important to understand that the expansion of enrollment age policy for Great Start Readiness Programs and the implementation of shared-time agreements statewide have increased the number of students funded by the SAF. In other words, overall student count would have declined more.

Bottom Line and Other Considerations

The GF/GP revenue estimates have been decreased, which may have an impact on the SAF as the budget process moves forward. Now that we have an agreement on the revenues, budget targets can be set and lawmakers can proceed with the budget debate to reconcile any differences in the budgets – Governor’s, the House’s, and the Senate’s.

The question now becomes whether the final revenues will be enough to satisfy the budget proposals and other priorities of the legislature including the recent discussion on closing the MPSERS system. The future pressures on the GF/GP could also be an issue as that fund shows a significant reduction in estimated revenue from the January 2017 consensus, especially when we look at the combined effect on all three years together ($400 million). The interaction between the two funds is always something we consider in evaluating ongoing budget pressures and the likelihood of a raid on the SAF.

The ever-looming discussion on closing the MPSERS Hybrid system may be a bargaining chip in finalizing the budget, but for now that has just been talk without hard language in a proposal to review. We are watching that situation closely as are other school management representatives. We still hope the SAF budget will be hammered out by the Governor’s June 1 self-imposed deadline, but at this point that may not be realistic with the unsettled issues.

There is more to come on the budget, but for now at least we have passed budgets by the House and Senate and the May revenue estimates. We’ll keep on top of this over the next month and update you when things begin to take shape. Until then, please proceed cautiously with budget and negotiation strategies. Although it appeared there may be some increased funding that could end up in the foundation allowance, being conservative until we see the final version is always advised!

Stay Tuned!